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Sound Advice: December 8, 2021

Individual Retirement Accounts

Years ago, the go-to choice for saving money for the future was savings accounts.  Back in what now seems like the stone age, you opened your account, got a passbook, and periodically deposited funds for the years ahead.  When you made your deposits, the teller would update the interest you earned and that was that.  The biggest problem was remembering where the passbook was. 

Folks who were more adventuresome and risk-tolerant opened brokerage accounts so they could buy stocks and bonds, often on the recommendation of their stockbrokers.  Those were the days of high-cost investing, before mutual funds took center stage.

In the mid-1970s, however, two major changes substantially improved the picture for individual investors.  One was the beginning of discounted commissions for buying and selling stocks.  The second was the debut of Individual Retirement Accounts (IRAs).  These accounts made it possible to invest for retirement and defer tax payments until funds were withdrawn.

The first of these is known as a Traditional IRA. It was later followed by a Roth IRA, SIMPLE IRA, SEP IRA, and Beneficiary IRA.

The Traditional IRA is relatively straightforward.  Contributions are made from pretax funds and they reduce the level of taxable income.  Gains and earnings in the account have no tax impact until funds are withdrawn.  The annual limit for contributions is $6,000.  For people who are 50 or older, the limit is increased to $7,000.  Required Minimum Distributions begin at age 72.

A Roth IRA is funded by contributions from after-tax income.  There is no tax on withdrawals and there are no Required Minimum Distributions.  Even so, funds cannot be withdrawn tax-free until five years have passed since the first contributions were made.  The contribution limits are the same as for Traditional IRAs.  The limits apply whether there is only one IRA or multiple IRAs.

Unlike the Traditional IRA and Roth IRA, which are set up by individuals, SIMPLE IRAs are set up by employers of companies with relatively steady profits. (SIMPLE stands for Savings Incentive Match PLan for Employees.) For these, contributions must be made by employers and may be made by employees.  The contribution limit for 2022 is $14,000 plus $3,000 for those 50 and older.  A SIMPLE IRA must be open for two years before a distribution can be made.

SEP (Simplified Employment Plan) IRAs are set up by sole proprietors and small business owners.  They are best suited for businesses with fluctuating income, allowing employers to decide the timing and size of contributions, which can be up to 25% of an employee’s annual salary or $57,000, whichever is less.  

Beneficiary IRAs are inherited IRAs.  Additional contributions may not be made.  For IRA accounts inherited after December 31, 2019, nonspouse beneficiaries must withdraw all funds within 10 years of the original owner’s death.  Spouses have more flexibility.  They can roll over the inherited IRA into their own existing individual retirement accounts and defer Required Minimum Distributions until age 72.

For all of these, there is the opportunity for tax postponement and savings.  This opportunity comes along with rules that require close attention.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883


Any questions?  Please contact me at


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